IMF Executive Board Concludes 2013 Article IV Consultation with Paraguay

Press Release No. 14/62
February 18, 2014

On February 14, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation with Paraguay.1

Background

Paraguay enjoyed robust economic growth in the past decade, on the heels of the export commodity boom, and supported by prudent macroeconomic policy implementation. Despite weather-related shocks hitting the key agribusiness sector, the economy has grown at an average rate of 4.7 percent a year since 2003 compared with about 2 percent the previous decade. Robust growth has been accompanied by declining inflation, particularly since 2011 when the central bank adopted inflation targeting. Despite the acceleration in growth in the 2000s, poverty and inequality in Paraguay remain among the highest in the region.

Activity rebounded to an estimated 13 percent in 2013 as the agricultural sector recovered sharply from the previous year’s severe drought. Rising agricultural output led to higher exports and a surplus of close to 1 percent of GDP in the external current account, despite a deterioration in the terms of trade. Non-agricultural activity has been less volatile, growing at about potential in the past two years, underpinned by rising consumption. End-2013 inflation fell to 3.7 percent—below the central bank’s inflation target rate of 5 percent—despite increasing food prices. Private sector credit growth has slowed to about 17 percent in nominal terms since end-2012, with loans concentrated on the agricultural sector; consumer credit has also grown rapidly, albeit from a low base. Paraguay’s banking sector remains well capitalized and profitable, with low nonperforming loans.

Macroeconomic policies broadly supported the recovery. Fiscal spending under the stimulus implemented in 2012 decelerated in 2013 due to stricter spending controls, though the central government deficit increased slightly to about 2 percent of GDP from 1.8 percent in 2012 as tax revenue remained modest. Monetary policy was on hold during much of 2013 until the central bank raised the policy rate by 100 basis points over December 2013 and January 2014, in light of incipient inflationary pressures.

The outlook for 2014 is positive. Growth should be strong at 4.8 percent, underpinned by continued dynamism in the agricultural sector and rising infrastructure investment. Annual inflation will likely increase to the central bank’s target rate of 5 percent. The fiscal deficit should remain low, under the introduction of the recently approved Fiscal Responsibility Law. The external current balance would revert to a small deficit amid slightly deteriorating terms of trade and rising import volumes. Overall, the risks to this outlook are balanced. The main downside risks stem from regional growth and global borrowing conditions, while upside risks include faster-than-expected progress in reforms.

Executive Board Assessment2

Executive Directors welcomed Paraguay’s recent economic recovery and favorable outlook, underpinned by strong economic policies and fundamentals, with low debt, sizeable official reserves, and small fiscal and external imbalances. Directors noted that the key challenge ahead is to improve social and economic development, while strengthening the macroeconomic policy framework. They took positive note of the authorities’ ambitious reform agenda and the critical legislation that has already been enacted to address institutional and structural weaknesses. Directors emphasized that resolute implementation of these laws and continued sound macroeconomic policies are necessary to reduce poverty and foster broad-based sustainable growth.

Directors welcomed the strengthening of the fiscal framework. The fiscal responsibility law provides a sound anchor to underpin fiscal sustainability. They encouraged the authorities to make the framework stronger, by further improving the quality of government spending, strengthening tax and customs administration, and enhancing the capacity to deal with potential risks from public-private partnerships. Civil service and pension reforms are also needed.

Directors welcomed the authorities’ prudent monetary policy stance and the advances made in implementing an inflation-targeting regime. They encouraged additional steps to complete the transition towards a full-fledged inflation-targeting regime, including developing an active interbank money market, strengthening risk-based bank supervision, and updating financial sector legislation. Maintaining exchange rate flexibility and greater efforts to reduce dollarization will strengthen the monetary policy framework and help cushion the economy against potential shocks. Over the medium term, macroeconomic policies should be guided by the fiscal responsibility law and inflation-targeting frameworks. Directors called for steps to address the remaining deficiencies in the anti-money laundering regime.

Directors agreed that reducing poverty and inequality is a priority. They encouraged the authorities to sustain all the initiatives underway to promote social and economic inclusion while protecting vulnerable groups through social safety nets. Reform efforts should particularly focus on improving the business climate, addressing labor market inefficiencies, and increasing female labor participation as well as human capital investment. Improved public enterprises management will also facilitate access to basic public services at reasonable cost.


Paraguay: Selected Economic and Social Indicators

 
I. Social and Demographic Indicators

Population 2012 (millions)

6.6  

Gini index (2011)

    52.0

Unemployment rate (2012)

4.9  

Life expectancy at birth (2010)

  72.3

Percentage of population below the poverty line (2011)

32.4  

Adult illiteracy rate (2011)

  4.7

Rank in UNDP development index (2012)

111 of 186  

GDP per capita (US$, 2012)

  3,730.2
 
II. Economic Indicators
        Est. Proj.
  2008 2009 2010 2011 2012 2013 2014
               
(Annual percentage change, unless otherwise indicated)

Income and prices

             

Real GDP

6.4 -4.0 13.1 4.3 -1.2 13.0 4.8

Nominal GDP

16.3 -2.0 20.0 14.6 0.0 15.6 9.7

Consumer prices (end of period)

7.5 1.9 7.2 4.9 4.0 3.7 5.0

Nominal exchange rate (Guarani per U.S. dollar, eop)

4,945.0 4,610.0 4,573.8 4,439.9 4,288.8 4,585.0

Monetary sector

             

Currency issue

15.0 11.3 18.5 11.6 17.5 13.9 10.1

Credit to private sector

62.0 21.4 37.3 25.8 15.8 17.5 11.9

Liabilities to private sector

42.4 24.9 19.2 19.4 14.1 20.6 10.6

External sector

             

Exports (fob)

29.7 -20.3 35.1 20.7 -7.8 16.0 5.3

Imports (cif)

44.7 -23.6 44.7 22.9 -5.8 10.1 9.0

Terms of trade

3.3 -3.0 8.2 14.3 -10.2 -7.0 -9.1

Real effective exchange rate 1/

16.3 -7.4 2.8 13.4 -0.3 6.8
(In percent of GDP, unless otherwise indicated)

Current account

1.0 3.0 -0.3 0.5 -1.0 0.9 -0.9

Trade balance

5.7 7.1 4.3 3.5 2.2 4.6 3.1

Exports

52.6 48.6 50.6 52.3 46.7 47.6 47.8

Imports

-46.9 -41.6 -46.4 -48.8 -44.5 -43.0 -44.7

Capital account and financial account

0.9 -0.3 1.1 2.0 1.9 1.6 0.5

General government

-0.5 0.1 0.3 -0.2 -0.1 1.7 0.5

Private sector

1.4 -0.4 0.8 2.3 2.0 -0.1 0.0

o/w Direct investment

1.1 0.6 1.0 2.3 1.9 1.3 1.7

Net international reserves (in millions of U.S. dollars)

2,876 3,817 4,165 4,971 4,983 5,889 5,763

(Stock in months of next year imports of goods and services)

4.8 4.4 3.9 5.0 4.5 4.9 4.6

Gross domestic investment

16.4 13.8 16.2 16.2 15.4 15.9 16.4

Private sector

13.5 9.1 11.8 11.6 9.8 11.1 11.6

Public sector

3.0 4.7 4.5 4.7 5.6 4.8 4.8

Gross national saving

17.4 16.8 16.0 16.7 14.4 16.8 15.5

Private sector

11.7 13.1 11.0 10.6 10.8 14.4 13.5

Public sector

5.7 3.7 4.9 6.0 3.6 2.5 2.0

Central government revenues

15.8 17.5 17.1 17.4 18.9 17.0 17.0

o/w Tax revenues

10.7 11.6 12.0 12.1 12.7 11.7 12.0

Central government expenditures

13.5 17.5 15.9 16.7 20.8 19.0 18.9

o/w Wages and salaries

6.5 7.7 7.3 7.4 9.6 9.3 8.5

Central government overall balance

2.3 0.1 1.2 0.7 -1.8 -2.0 -1.8

Consolidated public debt (in percent of GDP) 2/

22.8 22.5 18.6 16.2 15.9 20.9 19.1

Memorandum items:

             

GDP (in billions of Guaranies)

80,735 79,117 94,934 108,795 108,832 125,856 138,079

GDP (US$billions)

18.5 15.9 20.7 24.1 24.9 28.4 29.7
 

Sources: Central Bank of Paraguay, Ministry of Finance; and Fund staff estimates and projections.
1/ Average annual change; a positive change indicates an appreciation. For 2013, end-November.
2/ Includes letras de Regulacion Monetaria (Central Bank paper).


1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in the summing up can be found here:
http://www.imf.org/external/np/sec/misc/qualifiers.htm.

2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.



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